Bitter divisions undermine Europe’s digital tax plans

When European leaders gather this week to hammer out how to tax the digital world, lawmakers will be divided into two camps: the haves and have-nots.

On one side stands a group of 19 European countries, including the region’s largest economies, who want the likes of Google, Amazon and others to pay more into their national coffers and whose impatience over tax peaked this month. These demands follow years of complaints that tech giants earn billions of euros from these countries’ consumers without paying their fair share. The tech companies deny the allegations.

Opposing this renewed effort to tax digital goods and services are a shrinking number of countries, including Ireland, that have become a home-away-from-home for Silicon Valley’s largest companies. That includes offering low corporate tax rates and other financial incentives to set up shop in Dublin, Luxembourg and elsewhere.

Officials told POLITICO that the French-led group of countries that want changes to the current tax regime reignited their plans — including potentially taxing digital companies on revenues (rather than profits) generated in individual member countries — after growing frustrated by the European Commission’s failure to push ahead with regional tax proposals.

“Countries are left with a bitter taste in their mouths because there’s no agreement on taxing profits of digitalized companies” — Pascal Saint-Amans, director at the OECD

Countries remain at loggerheads over the Commission’s so-called common consolidated corporate tax base proposals, aimed at taxing companies’ profits according to where their revenue is generated across the Continent. Several officials said progress on these plans was not expected anytime soon.

“Countries are left with a bitter taste in their mouths because there’s no agreement on taxing profits of digitalized companies,” said Pascal Saint-Amans, director of the Center for Tax Policy and Administration at the OECD, the international organization helping to push through the global reforms.

“We’re at a stage where countries are saying they will move forward because of domestic political pressure,” he added. “The upcoming months will be critical.”

Initiatives agreed at the Organization for Economic Cooperation and Development are non-binding, albeit influential. It’s ultimately up to members to implement OECD standards into national law, leaving little promise that all countries will uniformly act to ensure that digital giants pay their dues.

An EU initiative, on the other hand, would have immediate implications for web giants if fully backed — regardless of what the international community thinks.

The Commission tried to regain momentum from European countries last week when it announced its own tax plans because of the global inertia on tax reforms. The aim would be for Facebook, Google and Amazon, among others, to pay more on their local operations within the EU.

Yet in the build-up to this week’s summit in Tallinn (where digital tax is not officially on the agenda, but is expected to be central to discussions), France, Germany, Italy and Spain circulated their own proposals that went beyond what the Commission called for. That included potential new sales taxes to force companies to pay more in countries where people buy digital goods or services. The idea, according to officials, would be for tech giants to comply with the same rules that apply to non-tech firms.

“It makes no sense to apply a double standard that will ultimately alter the competitive conditions in the market,” the paper stated.

Despite the growing number of EU countries calling for tech giants to pay more tax, legal experts say it will be difficult, if not impossible, to push ahead with regionwide changes because any overhaul would require all member countries’ approval.

That remains unlikely, particularly as Irish officials are increasingly sensitive to any EU proposal that involves changes to national tax policy, according to a person with knowledge of the matter.

Tax fast-track

In recent weeks, tech executives have been startled by how fast EU countries’ potential unilateral tax plans have gained regionwide momentum. Many question how such efforts would allow the Continent to remain competitive with the likes of the U.S. and China, which already have outpaced the Continent on many digital issues.

Companies add that they pay sufficient levels of tax wherever they operate, and any changes need to be implemented at global — not just European — level to avoid conflicts between rival governments over where companies should pay into national budgets.

“Should the EU go ahead and unilaterally change these tax rules, it would almost certainly violate the terms of international treaties,” said Joe Kennedy, a senior fellow at the Information Technology and Innovation Foundation, a think tank with close ties to industry.

“The United States would be especially harmed,” he added. “Because U.S. companies could immediately deduct any increase in European taxes from their U.S. tax liability.”

Bruno Le Maire, right, the French finance minister, pitched his German counterpart Wolfgang Schäuble, left, about potentially taxing tech companies more aggressively on their local operations | Sean Gallup/Getty Images

Spokespeople for Amazon, Google, Facebook and Apple declined to comment.

These warnings have done little to sway those European countries eager to push through tax reforms.

France’s finance ministry — under direct instructions from French President Emmanuel Macron — started drawing up its plans in July, according to several people with knowledge of the matter.

Officials said taxing tech companies was a mass-market issue for voters in many of Europe’s largest economies, notably in Germany. In recent months, Bruno Le Maire, the French finance minister, pitched his German counterpart Wolfgang Schäuble about potentially taxing tech companies more aggressively on their local operations.

“Having different rules in the EU may have consequences, it could lead to uncertainty and issues of double taxation” — Pascal Donoghue, Ireland’s finance minister

Once Schäuble was on board, others, including Italy and Spain, followed suit. And at a meeting of EU finance ministers earlier this month in Estonia, nine other countries led by Poland also backed the proposals, according to several people with knowledge of the matter. This cohort now represents all of Europe’s largest economies, as well as governments that represent the lion’s share of the region’s population.

The French-backed lobbying, however, has not won over all EU countries.

Alongside traditional holdouts like Ireland and Luxembourg, officials from the U.K., Sweden and Cyprus also remain skeptical about efforts by Europe to tax the digital economy alone, according to several people with knowledge of their discussions.

In particular, these countries still want greater global coordination through the OECD, which will publish a report early next year about possible ways of revamping digital taxes worldwide. They also fret that any unilateral changes from EU countries may anger the United States, whose politicians have already criticized previous European plans to force the likes of Google and others to pay more into national budgets.

“It would be premature and difficult to agree at EU level,” Pascal Donoghue, Ireland’s finance minister, said at a recent EU meeting with his counterparts from across the region. “Having different rules in the EU may have consequences, it could lead to uncertainty and issues of double taxation.”